If ever the UK body politic needed reminding why European institutions make terrible -- even dangerous -- legislation, surely the imminent 'hedge fund bill' is the last straw. As early as Monday the new Con-Lib government's George Osbourne will fight passage of this legislation in the European parliament, with nary a chance of defeating it.

In their populist hunt for a bogeyman, the Eurocrats have latched onto hedge funds, blaming them for various aspects of the financial crisis (CDO trading, shorting bank stocks, etc), and even for the Greek debt crisis. In spite of scant evidence, Brussels declared these funds to pose a 'systemic risk' to the financial sector, and drafted new rules to curtail and control them.

So far, so mediocre. But the real disaster is that the politicians have failed to understand the structure of the equity financing markets, and have lumped into this legislation not only hedge funds, but also private equity firms, real estate funds and hundreds of venture capital firms.

Not only does this directive do nothing to address systemic risk (neither PE-backed nor VC-backed companies pose any, and arguably hedge funds don't either), it threatens to throttle the one potential engine of growth in Europe: entrepreneurship.

If passed in its current form, the AIFM directive will:

require VC-backed companies with 50 or more employees to disclose their financial performance, capital structure, divestment plans, research spending and strategy;

discriminate against non-EU investors in European funds, making it more difficult to raise new funds. This is likely to lead to retaliatory action from the US, further reducing the flow of capital to innovation.

It is estimated that the cost of complying will set portfolio companies back €30k or more per year. But more insidious is the loss of competitiveness that results from revealing so much to the market. Many growth companies will be required to disclose more confidential information than divisions of large public companies or foreign companies with which they compete! Score one for big business against the little guy...

European venture capital is still a relatively young industry, and one that is going through tumultuous times. But the growing number of high-growth technology and Internet ventures, and the development of a real class of repeat entrepreneurs, remains one of the few bright spots. And they arguably represent one of the few export industries that can help pull this continent out of the doldrums.

This legislation has too much political momentum to be stopped, although there is some hope of it being watered down as it goes through the approval process. If only the Eurocrats invested as much time in thinking about the real systemic risks to the economy, like the structure of the banking industry or the lack of control over national budgets... and left the innovation sector alone.

I used to be a real Europhile and advocate of the UK joining the Euro. But if this kind of legislation is the best our 'European government' can do, then we had better steer well clear.

An investment by taxpayers of £74m into regional venture capital funds has been marked down to just £5m according to a report by the Whitehall auditor, which is highly critical of the government’s wider venture capital programme.

[...]

Since 2000, the Department for Business has invested £338m in 28 venture capital funds – through seven umbrella schemes – that have provided seed money to more than 800 companies.

[...]

The regional venture capital funds – one of the seven schemes – has reported an interim rate of return of -15.7 per cent, far worse than the -0.4 per cent delivered by other similar European funds.

Meanwhile, many of the funds have been paying high costs to private sector fund managers. The RVCF, for example, spent £46m in fees against £130m invested up to December 2008.

Source: Financial Times

Not only do these 'investments' artificially prolong the life of bad fund managers; they also distort the market for commercial VCs that are forced to compete with subsidised funds. The money would be so much better spent reducing red tape in the investment world and/or supporting academic research.

Green IT conferences are proliferating, like Green IT '09 which just took place in London. (Where are the slideshare presentations? Where is the video footage? For tech industry event organisers the guys at Tech:Touchstone seem to be in the dark ages...)

Sorry for that mini-rant.

Let's hope the green IT initiatives don't become casualties of the recession. Thinking about green IT is good.

Unlike industrial green initiatives, succesfully improving the 'green' credentials of IT usually results in cost savings. For example, companies clearly have a strong financial incentive to reduce the energy consumption of data centres. Similarly, using video conferencing and remote support tools reduces travel costs and carbon footprint all at once.

If you're attending the Cloud Computing expo in Prague next week, please check out the session on Green SaaS being given by Lluis Font, the CEO of NTRglobal (disclosure: Kennet portfolio company). Lluis is a great evangeliser of green computing, and he has some surprisingly simple ideas on how companies can save money and be greener at the same time.

I won't be able to attend, but I'm looking forward to hearing from you all about the event!

I've got a real issue with the breathless, paranoid tone of a lot of media coverage lately. The combination of the 24-hour news cycle and too many news outlets, amplified by P2P communications methods like Twitter, is generating too much panic and too little analysis and reflection.

I confess I sometimes miss the way we watched news 20 years ago, gathered as a family at 8pm for the one evening news programme, which presented 24 hours of digested, verified, analysed news for our consideration.

In future posts I'd like to explore further some of the negative effects this excessive media hype has on government policy making in particular, and whether anything can be done about it. In the meantime, thanks to The Economist for exposing one particular story as being the result of a political turf war rather than a real global threat: the recent reports of serious cybersecurity attacks on US infrastructure.

We all read the news stories about Chinese hackers' breaching the US electricity grid and several national agency computer networks. There was something faintly hard to believe about the sudden panic. Now it turns out that this story was leaked, and hyped, by intelligence agencies fighting for control over cybersecurity. Read the detail here.

It's an appalling abuse of the viral power of today's media, and makes it difficult for any of us to tell real dangers from fiction. Let's hope that more of the supposedly serious media (like The Economist) improve their record of exposing these stories, preferably before they go into hype-mode.

Last fall I wrote about how Obama's campaign made such good use of web marketing to mobilise grassroots supporters and spread campaign messages. His team have continued to press that advantage from the White House, most recently rallying the 13 million people in Obama's email database (and 5 million in social networks) to lobby Congress in favour of the proposed budget bill.

Derrick Harris over on GigaOM yesterday kicked off an analysis of how the Obama technology gurus (Dan Langer and Luke Peterson) harnessed integrated email databases with traditional voter calling efforts to leap ahead of the McCain camp. What is particularly impressive here is that they did it using off-the-shelf technologies at relatlively low cost and in a way that clearly scaled very very well.

In Part II of the article out today, details emerge that make this project a poster-child for web marketing best practices, and for what ambitious government IT projects could be if they were run by commercial, web-savvy people and not Pentagon bureaucrats.

Laptops, open-source databases, cloud computing resources, VoiP, mobile phone applications, and every flavour of SaaS. This is definitely not the Microsoft generation -- the campaign team used more GoogleDocs / EditGrid spreadsheets than traditional Excel.

Both the UK and US governments could learn a thing or two from Obama's team about IT procurement for data integration projects... Let's hope some of it rubs off.

As my partner Michael Elias pointed out this morning (and Jeremy Paxman did last night), this guy really knows how to use email:

Max --

I'm about to head to Grant Park to talk to everyone gathered there, but I wanted to write to you first.

We just made history.

And I don't want you to forget how we did it.

You made history every single day during this campaign -- every day you knocked on doors, made a donation, or talked to your family, friends, and neighbors about why you believe it's time for change.

I want to thank all of you who gave your time, talent, and passion to this campaign.

We have a lot of work to do to get our country back on track, and I'll be in touch soon about what comes next.

But I want to be very clear about one thing...

All of this happened because of you.

Thank you,

Barack

Really makes you feel special (even if you have no vote and are not allowed to donate, like me). It's no secret that Obama killed this election in part through his masterful use of email, SMS, viral videos and and social networking sites to:

raise tons of money,

get his message out unfiltered, and,

generate huge enthusiasm which translated into a record voter turnout.

So what happens when this tech-savvy guy gets into the White House? Will we continue to get regular email updates from the President? That would be cool.

Will he use his direct channel to millions of Americans (and foreigners) to make the case for difficult policy decisions directly to the people? That could be revolutionary.

This Presidency will be the first truly web-enabled administration. I'm sure someone will call it Government 2.0 [cringe]. I think both Congress and the media could end up wrong-footed as Obama supplements the traditional political horse-trading process with direct campaigns to the people. It's going to be very interesting.

A lot of people have been asking me what impact the global financial crisis has on the business of venture capital and growth equity. The short answer to this question is: not much. The slightly longer answer is: not much, yet.

Let me explain.

If you are currently raising a venture capital or growth capital fund, the paralysis of investors worldwide means slower decision-making and a longer fund-raising cycle. You may even lose some previously committed investors who are now conserving cash to cover losses in other asset classes. If you have recently raised a fund then you are in good shape. As banks, non-bank companies and consumers are rapidly finding out, when credit is tight cash is king.

But what about the impact on our business of investing in businesses? Our existing portfolio companies will feel the crisis on two fronts: commercial performance and exit horizon.

First, a prolonged recession will make it harder to land customers and grow revenues. This means that business plans will take longer to achieve. The exception may be in countercyclical or recession-proof segments, such low-priced entertainment (eg, games), discount retail (eCommerce), cost-reduction tools (eSourcing, supply chain optimisation), and products that address the current crisis directly (like compliance software, or trading platforms for previously 'hidden' financial assets). More on the latter category in a future post.

Second, as the IPO window remains shut for longer and M&A activity slows, there will be fewer buyers for companies and acquisition prices will be depressed. We already saw throughout 2008 a flight to quality: companies with strong topline growth and high profitability are still being acquired and achieving good valuations. The companies best able to survive this environment are those with strong 'operating leverage' -- that's VC-speak for high gross margins. High margins reduce the effect of slower revenue growth and give companies more flexibility to reduce their cost structure as the market slows.

For investors, the key is to be able to wait for the right time to sell a company. This means both the internal timing (strong operations, good growth, a clean balance sheet) and external timing (market interest). Companies that are profitable or close to profitability have a huge advantage in this market.

The impact on the private equity industry will vary drastically. At the top end, LBO funds have already seen a huge increase in their equity cost as they refinance debt packages with equity, while their companies' earnings decline. This is a continuation of the shake-out that started a year ago.

The second most affected category will be early-stage VC. Most VC-backed companies are loss-making and were valued at the time of investment on the basis of aggressive growth forecasts, or expected strategic value on exit, or both. Slower growth and a longer-time-to-exit means they will need to raise more capital, probably on worse terms. This increases the equity cost of their investors and extends their investment horizon, depressing rates of return.

Already we are seeing VC firms increase the follow-on reserves for existing portfolio companies, which will mean less capital available for new investments. In the last downturn, many shifted their focus to later-stage investments, leading to a funding drought for pre-revenue companies. More on the dilemma for early-stage companies on Fred Wilson's blog here, and Jason Calacanis' here.

The least affected, in my view, will be growth equity and midmarket buyout firms. Growth equity portfolio companies typically have little or no debt financing and are cash-generative (or can get there quickly). This means they can adapt their operations to slower market conditions, invest in discrete growth opportunities, and wait for the right time to exit. The best ones will be acquired for the quality of their earnings by savvy buyers even during the downturn. Growth equity investors can focus these businesses on improving the quality of the business and finding pockets of higher growth while positioning the business with potential acquirers.

Lastly, the more unpredictable effect is on the making of new investments in the technology markets. In the 2001-2003 downturn (which was heavily weighted toward the technology industry) few entrepreneurs felt confident enough to write aggressive growth plans, and as a result it was difficult to find quality companies to invest in. But I think this one is going to be different. Here's why:

First, this recession is going to be more generalised, similar to the banking-led industrial downturn of 1980-82, with a correspondingly smaller effect on the technology industry itself.

Second, the European investment eco-system is far deeper and more mature than it was in 2001. Back then, a nascent VC and entrepreneurship market was nearly wiped out by the collapse in stock market values. Today, we are tracking thousands of European technology companies that have shown more than 5 years of continuous growth, are profitable and in many cases geographically diversified. This represents a very deep pool of potential investments, which are supported by a broad universe of specialised lawyers, bankers, recruiters, and angel investors. So, I think that for investors with funds, good research capability and a broad network of sources for dealflow, there will be no shortage of investment opportunities. Equally, for entrepreneurs with capital-efficient businesses, that have demonstrated an ability to prosper in good times and bad, there will be no shortage of investment capital.